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Finance and Misallocation: Evidence from Plant-Level Data | CFSP | Consortium on Financial Systems and Poverty

Finance and Misallocation: Evidence from Plant-Level Data

Virgiliu Midrigan
Daniel Yi Xu
Publication Type: 
Working Papers
Publication Year: 
2011

We study a model of establishment dynamics in which entrepreneurs face a financing constraint.  We ask: does the model, when parameterized to match salient features of plant-level data, predict large aggregate TFP losses from misallocation?  Our answer is: No.  In our model, efficient establishments quickly accumulate internal funds and grow out of their borrowing constraint.  The model thus predicts TFP losses from misallocation, even in an economy with no external finance, that are at most 5-7%.  This is not an impossibility result.  We present parameterizations of the model in which finance frictions cause substantially larger TFP losses.  Such parameterizations are, however, at odds with important features of plant-level data: the variability and persistence of plant-level output, as well as differences in the return to capital and output growth rates across young and old plants. 

This paper was presented at the August 2011 meeting of CFSP's Savings and Financial Underpinnings of Macro Models Workshop. The corresponding presentation and discussion are also available.

Region: 
East Asia and the Pacific
Region: 
Latin America/Caribbean
Country: 
Korea
Country: 
Colombia
Topic: 
Economic Modeling
Topic: 
Enterprise
Topic: 
Growth